Starting a Roth IRA as a Teenager
Written By: Brianna K.
Any teenager can start a Roth IRA right now and be rich by the time they are retired. But what are Roth IRAs? How can they help you? Why are they important to start at a young age? What are the advantages? Roth IRAs are tax-advantaged, retirement savings accounts that will allow you to withdraw your savings tax-free. In simpler terms, it is a special retirement account that allows you to put in money and pay taxes now instead of later. Therefore, if taxes are higher in the future, you do not have to worry about it then, to pay off.
Anyone who has a taxable income can contribute to a Roth IRA. Therefore, if your annual income is above a certain amount, you are eligible. The maximum annual contribution an individual can make in 2019 and 2020 is $6,000. Those that are 50 years old and up can contribute up to $7,000. Usually teenagers start Roth IRAs when they start receiving paychecks from their first job. Starting an IRA can help you save for your future and retirement. But, minors IRA's must be set up as a custodial account by a parent and/or other adult. There are a few different types of IRAs for minors. The difference between a traditional and a Roth IRA is the time you pay taxes on the money. With a traditional IRA, you pay taxes when you withdraw the money (during retirement). As for Roth IRA, you pay taxes when putting your money in the account. There are many advantages for minors starting Roth IRAs young. As for opening an account for a child it is the same as an adults account. Although, the opening amount to invest can be less than the brokerages's usual minimum. The only main difference is having custodial or guardian on an account. All you need is your social security number when you open the account. Some firms that currently open accounts for minors include: Charles Schwab, E*Trade, Merrill Edge, Fidelity, TD Ameritrade, & Vanguard. You can fund your Roth IRA at this age by having earned income from a job.
It’s never too early for you to start a savings for retirement account. One of the biggest advantages for starting an IRA at a young age is the end result. The more time you have an account and are actively depositing, means more growth. If you save $360 per month, by the time of retirement you will be a millionaire. You can use the account for multiple purposes. You may not get to withdraw your money for a long time, but you can use it to save for other purposes, too. (It does not have to be just a retirement account). It is a perfect time for teenagers to start saving with this type of an account. As well as getting a return after many years. Roth IRAs can make a large difference in the long term for results. It is important to start investing your money at a young age because it will only grow and go up.
Works Cited
Max, Sarah. “It's Never Too Early to Get Your Kid Saving for Retirement. Here's How.” Roth IRAs Are Ideal for Your Teenager to Start Saving for Retirement - Barron's, Barrons, 16 Feb. 2019, www.barrons.com/articles/roth-ira-for-teenagers-51550247933.O'Shea, Arielle, et al. “Why Your Kid Needs a Roth IRA.” NerdWallet, 12 Aug. 2019, www.nerdwallet.com/blog/investing/why-your-kid-needs-a-roth-ira/.
Segal, Troy. “The Complete Guide to the Roth IRA.” Investopedia, Investopedia, 7 Nov. 2019, www.investopedia.com/terms/r/rothira.asp.
I agree that Roth IRA accounts are much better than traditional IRA accounts - for teenagers, at least. By taxing the money first, you don't need to worry about taxes when taking the money out of the account. This is a good thing because then we (as teenagers) will get the actual amount of money that we need/want. Additionally, it is a great idea to start one of these accounts now. The money will compound and grow over time, so by the time we are 60+ there will be plenty of money inside the Roth IRA. Plus, because the money is taxed upon input, we can take it out at will in the future. Smart decisions lead to great success.
ReplyDeleteI agree that it is very important to start saving for retirement as early as possible, so that the savings has time to grow. However, I did not know that it was possible for minors to create their own Roth IRA (with the help of a parent). Roth IRAs are especially beneficial, since you do not have to worry about your savings being taxed when you withdraw it, which can potentially save you money if the tax rate increases from the time you put your money in to when you withdraw it. Saving only $360 per month does not sound like a lot, but it can really add up to a great amount of money to retire with.
ReplyDeleteThis was very informative about Roth IRAs and the comparison between Roth IRA and traditional IRA accounts is important. With Roth IRA accounts being taxed already, you know that the money that is in the IRA is the money that you are getting when you withdraw, which cannot be said for a traditional IRA. I also like how you pointed out that Roth IRAs can be used for other things, such as emergencies, while traditional IRAs are really just retirement.
ReplyDeleteThis sounds like an extremely smart savings opportunity, I'm curious though are all roth ira's a 6% return? and how often is that interest paid?
ReplyDeleteThat is a great question Jadyn! The 6% return rate is an average of the returns on Roth IRAs, this is because Roth IRAs are investments, in stocks, bonds, ETF, etc. So the 6% return rate is simply an approximation, and it depends on the stock market. A good Roth IRA will have you diversify your investments, in order to simulate the overall trend of the market, because in general the market always goes up in the long run. The 6% return rate would be an annual one.
DeleteThis is a very key thing for us to be thinking about right now! The power of compound interest is unmatched in today's economy and is a great way to make money while literally doing nothing. The great thing about it is, you don't need a lot of money at the start, you just need time on your side for it to grow. This is something we all should become aware of, because it will help in the long run with retirement saving.
ReplyDeleteI feel like ROTH IRA's are better than Traditional IRA's because since you are paying takes every time you deposit money into the account, you don't have to pay taxes on the interest you make.
ReplyDeleteRoth IRA's are generally something teens don't think about with more important/prevalent events in a teenagers life. A Roth IRA would be something you can do and forget about but benefit from in the future. As easy as it is there's very few people who actually follow through with doing it. When I started mine the banker told me I was the youngest customer to start a Roth IRA. With Americans getting more educated about these things, especially younger adults, Roth IRA will begin to seem more normal and important.
ReplyDeleteTo quote Noah perfectly "This is a very key thing for us to be thinking about right now! The power of compound interest is unmatched in today's economy and is a great way to make money while literally doing nothing." I think that investments like this are vital to start young, as you can quite literally forget about, and then years later be sitting on a pile of money. It's also very convenient that you do not have to put in a lot of money at the start, but rather, give yourself a lot of time to allow that compound interest to build up annually.
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